As a business owner, bookkeeping and accounting can often feel like a chore. A necessary evil that you put off until the last minute and spend as little time as possible. But there are several ways bookkeeping and accounting can make your life easier and help you run a more successful, more profitable business.
As accountants like to say, accounting is the language of business. It’s the best way to objectively see what’s going on inside your business and plan accordingly. That objectivity lets you cut out the guesswork and reduce trial and error (along with all the money wasted on trial and error). Here are a few ways bookkeeping and accounting can help you run your business more effectively:
The break-even point
Whether you’re starting a new business, launching a new product or service, or just reevaluating what you’re currently doing, you need to understand the break-even point.
This is a fancy way of saying the point at which you make no profit but also no loss. Every product or service breaks even at a different point, depending on your pricing and your costs. Your accounting system provides the information you need to figure this out and plan ahead so you know how viable your product is and if you need to make any changes.
Let’s look at a quick example. If each unit of your product costs $50 to manufacture and you sell it for $100, then each unit contributes $50 toward your overhead fixed costs. If your fixed manufacturing costs are $5000, then you’ll break even at 100 units. After that, the $50 contribution starts contributing to profits.
It’s pretty easy to see how different factors can affect the break-even point. If you raised your price, you would break even sooner, assuming the market would still buy. If you reduce your variable unit costs, you’d have more to contribute toward break-even and profit. If you can lower your overhead, you’ll also reach break-even faster.
As simple as it may sound, until you’ve taken a look at the accounting and seen the numbers, it’s really not simple at all. There are many companies out there losing money on products and services that should be cut off, but they haven’t looked closely enough at each product to see which are moving them forward and which are dragging them down.
Maximizing your profitability
Hopefully, you don’t have any products or services that are causing you to lose money. Once you’ve gone past the break-even point, it’s time to evaluate, track, and improve profitability.
Just like we saw in the break-even example, your pricing, overhead, and variable costs can all impact how much sales contribute to your profits. You need a solid grasp on these numbers so your business is putting as much money in your pocket as possible for your efforts. Otherwise, you’ll be working harder than you need to for less reward than you deserve.
It’s crucial to remember that revenue and profit aren’t the same thing. What you bring in and what you keep can be very different. Oftentimes, businesses will make a big push to drive up sales revenue and actually damage profits.
They may run a big promotion and sell more products, but ruin their profit margin with a big discount. They may run an ad campaign to bring in additional sales but spend so much on marketing that they actually lose money. This is okay as part of a long-term plan to grow your market, but you need to be aware of the impact and know exactly what you’re signing up for.
Knowing your bottom-line profits is nice, but knowing profits for each line item can be far more helpful. You may find out that one product or service is barely breaking even (or even losing money) and others are bringing in the lion’s share of your profits, effectively subsidizing the first product and hiding its losses. A strategic shift to focus on the more profitable product could drastically boost your profits overnight!
To make the most of your profits, you need to be sure your accounting system is tracking everything in detail. In other words, it needs to break down costs and sales for each product or service so you can analyze it on that level. Then you need to commit to taking time to review your books on a regular basis and adjust if needed.
Taking your taxes down a notch
For most small businesses, taxes are one of the biggest expenses. Tax savings are a huge advantage because you don’t lose anything by reducing your taxes, as you might by cutting other costs.
It’s easy to put off your accounting tasks and push that proverbial (or not) shoebox of receipts at your tax accountant at the end of the year, but that’s really not the best option. There are two reasons you need to leverage your bookkeeping and accounting to minimize taxes.
First, there are a number of deductions and credits you may qualify for but only if your tax preparer can get a clear picture of your business. If your books are messy or you failed to document certain expenses properly during the year, your tax preparer may be unable to get you all the deductions you deserve. If they push ahead and claim them anyway, it could lead to an audit with you unable to substantiate your deductions.
Secondly, your taxes shouldn’t be a once-a-year event. Tax planning should be part of your strategic planning throughout the year. When you can see the real impact of each business decision on your finances, you can also factor in the tax implications. Would a certain choice bring in a little extra money but the additional taxes make it unprofitable? How do tax credits or bonus depreciation affect when you should purchase that new equipment?
Accounting is more than a last-minute pain to record your sales and expenses. It’s a powerful business tool that gives you an inside look at your business and helps you make better decisions every day. Is it time to improve your bookkeeping and accounting?